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A California investment firm went from near -2-

Back in 2005 to 2007, for instance, Yahoo, eBay and Dell all had what seemed to be bigger advantages than Google, Amazon and Apple, Black says. But what WCM says it hadn't expected was that Apple's mobile operating system would become so massively disruptive, changing the way nearly everyone interacts with their phones. The firm also didn't foresee Amazon building a third-party marketplace with a solid end-to-end experience for consumers, or Google's founders remaining so heavily engaged in their business, in contrast to Yahoo's revolving door-at-the-top.What WCM's managers were focusing too much on was a particular company's competitive advantages, known as "moats," Black says. They paid too little attention to what mattered even more: the direction the "moats" were headed in. After all, simply owning a company because of a seemingly wide advantage was foolish since businesses were always strengthening or weakening against their peers.

As clients fled, the firm caught a few breaks when it landed a $15 million account from a hospital in the Central Valley of California, plus $100 million from a Boston wealth management firm, between 2006 and 2007, just enough to keep the firm alive, according to Black. The firm had already been left reeling from the loss of one of its key managers, Neil Cumming, who died of brain cancer in 2005.

'Horrific" Performance

During the firm's darkest days from roughly 2007 to 2010, its domestic growth fund, which then represented the bulk of the business, "went through a horrific period of performance," says Mike Trigg, a former Morningstar Inc. equity analyst who joined WCM at 29 in 2006 and became a first-time portfolio manager a year later. "It was extremely lean times. Compensation was flat for many years and we were focused on trying to keep the business going. But I never once considered leaving because of the people. I really believed we had learned from the mistakes we made and had become a much stronger firm."

"In many respects, we're still thinking about how this can go wrong and what we need to do to get better," Trigg says. "We've maintained the same mindset we had at that period." Along with Black, Trigg, now 43, is one of five portfolio managers behind the roughly $27 billion WCM Focused International Growth fund. According to Morningstar, the fund's 1.05% expense ratio on its institutional share class lands in the middle quintile for its category, while its 1.30% expense ratio on retail shares is in the second-costliest quintile. Expenses are an important component for investors to evaluate because they come directly out of returns.The fund will be closing to new investors as of Nov. 30, a "welcome" decision following the strong inflows that were triggered by its success, says Morningstar analyst David Carey. Existing investors can continue to add or withdraw from the fund.Three of the portfolio's five managers, Trigg; Peter Hunkel, 49; and Sanjay Ayer, 40, come from unconventional backgrounds. Ayer is a Columbia University business school dropout who briefly toyed with the idea of opening a hamburger stand out of college. He joined WCM in 2007 at the age of 26, after following Trigg from Morningstar. Hunkel graduated from San Jose State University in 1995 and from nonprofit Monterey College of Law in Seaside, Calif., nine years later. He once sold strawberry containers for a packaging company. While Hunkel says he had some experience managing portfolios with a WCM-affiliated firm, it wasn't a whole lot.Long before WCM's fortunes soured, its asset managers were constantly rethinking their investment process, relying on so-called "pre-mortems" to plot out what might go wrong with the companies they invested in. So in 2004, Hunkel stepped forward with a proposition for what would eventually develop into the Focused International Growth strategy. He said that instead of trying to invest the fund in non-U.S. large- and midcap companies already in the relevant benchmark index, WCM should ignore the benchmark and construct its portfolio any way the firm sees fit.

That enabled WCM to bulk up on shares of non-U.S. consumer-staples, technology, and healthcare companies long before they became popular, Hunkel says. The fund's biggest holdings as of the end of the second quarter were LVMH Moet Hennessey Louis Vuitton SE and Taiwan Semiconductor Manufacturing Company Ltd. (2330.TW)

'A second chance'

Meanwhile, Ayer says he was making a litany of bad stock picks when he first joined the firm, which produced poor outcomes, like Arcos Dorados Holdings Inc. (ARCO), the McDonald's Corp. (MCD) of Latin America; and Sun Art Retail Group Ltd. , China's version of Walmart Inc. (WMT). He says his mistake was "blindly applying lessons from developed markets onto emerging markets," and ignoring how many countries were evolving differently. China, for instance, was developing an e-commerce sector that was "leapfrogging" over bricks-and-mortar stores.As international stocks gained greater footing in the financial market over the next handful of years, the team's stock picks -- including Taiwan Semiconductor to Chinese technology company Baidu Inc.(K3SD.SG) and Walmex (WALMEX.MX) , or Walmart's Mexican and Central American division -- started bearing fruit. WCM said that all of the stocks mentioned aren't an exhaustive list of the firm's holdings or recommendations, and there is no guarantee that its picks will be profitable.

"Everyone makes mistakes in this industry, but there is a fixed mind-set that you are either born with a magical investing gene, or branded as a poor stock picker and not given a second chance," Ayer says. "But I see it as something you should get better at over time. I made my fair share of mistakes and it took me a while to find my calling.""We built this pretty good platform where we can get the best out of people, allow them to think differently, and not get trapped by a profession that, as a whole, is about trying to show you're smart, and not admitting mistakes or showing vulnerability."

-Vivien Lou Chen


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10-11-21 1733ET

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